Statement of an IMF Mission at the Conclusion of the Staff Visit to the Philippines

An International Monetary Fund (IMF) mission led by Mr. Il Houng Lee, Advisor in the Asia and Pacific Department, visited Manila, the Philippines, during June 16-20, 2008 to exchange views with the authorities and other key stake holders on recent economic developments and the outlook. The mission issued the following statement in Manila:

"The macroeconomic policy environment has become more challenging. The Philippines, together with its peers in the region, faces the twin challenges of a slowing global economy and escalating food and fuel prices. Moreover, efforts to mitigate the impact of higher food prices on the poor adds to the fiscal burden. Due to past fiscal and other reforms, the impact on the overall economy from the deteriorating external environment has so far been contained. Nevertheless, continued prudent macroeconomic policy management is needed to navigate through the challenging times ahead.

"Growth is expected to slow and inflation will likely remain elevated. On the back of slowing external demand and softening consumption indicators, the economy is likely to grow 5.2 percent in 2008, down from 5.8 percent projected earlier. Meanwhile inflation is expected to remain close to double digit levels in the coming months as the recent increases in food and fuel prices filter through to the consumer price index. To its credit, the Philippines maintains a largely deregulated oil sector which has allowed it to avoid the fiscal problems being faced by some other countries from fuel subsidies.

"The mission is supportive of a targeted increase in pro-poor spending that may entail a modest fiscal deficit in 2008, but it is important to protect the 2009 fiscal program. The recent reduction in public debt, from about 100 percent of GDP in 2003 to 62 percent in 2007, has provided some scope for increased social spending. The additional spending should be limited to well-targeted schemes for protecting the poor, such as through well-designed conditional cash transfer schemes. Limiting the deficit and increasing the tax effort to secure revenue will assure investors that the Philippines remains committed to medium term fiscal consolidation. In this context, recent reforms to personal income taxation and the planned reduction in the corporate income tax will make it harder to achieve the ½ percent of GDP deficit goal for 2009. It is therefore imperative to adopt legislative measures as early as possible to reform fiscal incentives and excises and to find other resources, such as from accelerating tax administration reform, to protect the 2009 fiscal program.

"Monetary policy is appropriately hawkish in a rapidly evolving environment. Since the beginning of the year, inflation has risen faster than expected, mostly due to supply side factors. Nevertheless, signs of second round effects have emerged as core inflation has also risen, and the global commodity price hike increasingly appears as prolonged. Sustained high inflation can unseat inflation expectations and complicate macroeconomic management. Inflation also takes a heavier toll on the poor than the average household since food expenditure constitutes a much larger share of the poor's household expenditure. With the change in the balance of risks, the Bangko Sentral ng Pilipinas (BSP) has appropriately recalibrated its stance by increasing its policy rate by 25 basis points. The monetary authorities are prepared to take additional actions as and when necessary to address the threat of high inflation."